Both banks have routinely beaten analysts’ estimates, both on earnings and on revenue. The investors’ reaction was subdued. Wells Fargo & Co (NYSE:WFC) rose 1.77% on the day of the report, while JPMorgan Chase & Co. (NYSE:JPM) lost 0.31%. As Wells Fargo and JPMorgan are up 26.6% and 27.6%, respectively, is this a sign that a pullback is around the corner?
Rising mortgage rates
The recent trend that banks can’t ignore is a rise of mortgage rates, which have recently reached their highest levels in 2 years. The 30-year mortgage rate was around 3.50% back at the end of April–now, it’s higher than 4.50% and continues to climb.
Wells Fargo & Co (NYSE:WFC) has stated that one-third of its mortgage originations comes from new mortgages, while the other two-thirds come from refinancing. This is a very important fact, because as the rates rise, fewer and fewer people would consider refinancing their mortgages. Both Wells Fargo and JPMorgan Chase & Co. (NYSE:JPM) estimate that if the current rate environment continues, they would see a 30% to 40% decline in mortgage applications.
During the earnings calls, two CEOs have had different views about the situation. Wells Fargo & Co (NYSE:WFC)’s John Stump has stated that he does not manage the company for a specific rate environment, adding that while some parts of the company would do worse because of the rising rates, others would gain. Jamie Dimon, the CEO of JPMorgan, has stated that there would be a dramatic reduction in profits if the rates continue to rise.
Margins and growth
The quarter continued the margin trend for Wells Fargo. Net interest margin fell two basis points to 3.46%. The source of the decline was the growth in deposits. JPMorgan Chase & Co. (NYSE:JPM) also saw a rise in deposits, which totaled $432.8 billion, up 3% from the last quarter. JPMorgan’s net interest margin dropped from 2.83% in the previous quarter to 2.60%.
While you can see that the margins have been cut down, the growing volume on almost every business front has helped the banks to see good profits. As retail investors start to come back to the market, brokerage and asset management products have thrived.
It typically happens that retail investors need a rising market to become more active. The market performance has been good so far, but the future of the continuing inflow of money depends on the market results.
Is it going to continue?
Would the banks continue to deliver profits as clockwork like they have been doing for a while? This question interests not only shareholders of the abovementioned stocks, but also shareholder of banks that are still due to report, like Bank of America Corp (NYSE:BAC). The company, whose stock is up 19% so far this year, faces the same environment of rising rates. Given investors’ reaction to both Wells Fargo & Co (NYSE:WFC) and JPMorgan Chase & Co. (NYSE:JPM)’s reports, it’s safe to say that if you do not have a position in Bank of America Corp (NYSE:BAC), you’d better wait for the report to come out.
